Frost & Sullivan Says Falling Interest Rates Are Good
News
The lack of available capital for the procurement of new
aircraft and falling interest rates are the two major factors
triggering growth in the world aircraft leasing market. During 2008
and 2009, the aircraft leasing industry had been reeling under the
impact of the frozen credit markets and the slump in air traffic.
Due to the financial crisis, there were difficulties in arranging
funds. This led to an increase in the number of parked aircraft and
a decrease in the market value/lease rentals of aircraft.
Despite these impediments, the aircraft leasing industry was
able to maintain healthy profitability, as falling interest expense
has allowed leasing companies to maintain good profit margins.
Airlines have been able to raise equity funds of $4.8 billion and
debt of $25.7 billion between January 2008 and October 2009. Most
of the aircraft leasing firms that were up for sale were not
distressed assets, but were up on block as a result of their parent
company's poor financial health. Trends indicate that the aircraft
leasing industry is poised for a growth upswing within the next 4-5
years.
New analysis from Frost & Sullivan "World Aircraft Leasing
Market - Market Outlook and Investment Analysis", reveals that the
fleet of the leasing firms grew by 7.34 percent from 5,757 aircraft
in 2008 to 6,180 aircraft in 2009. It is expected to increase at a
compound annual growth rate (CAGR) of 5.76 percent from 2010-2015.
The total number of aircraft owned by the leasing firms is expected
to increase from 6,180 aircraft in 2009 to reach 8,646 aircraft in
2015.
"Banks from China and sovereign wealth funds from the Middle
East have shown interest in purchasing the aircraft of leasing
companies," says Frost & Sullivan Financial Analyst R.
Madusudanan. "The assets of aircraft lessors are likely to
stimulate interest among asset management companies that are
scouting around for stable incomes over the long term."
When lessors buy aircraft from airlines in a sale-and-leaseback
transaction, they tend to avoid pre-delivery payments (PDPs) and
the cost of servicing PDPs. With airlines facing a dearth of
liquidity, sale-and-leaseback transactions can be used to bolster
the liquidity position and strengthen the balance sheet. Due to the
decline in air traffic, the number of airlines declaring bankruptcy
and defaulting lease payments has increased. This has become a huge
restraint for leasing companies, as it negatively affects operating
income.
To overcome these restraints, leasing firms are ensuring that
they lease aircraft to creditworthy airlines. There is also an
initiative to raise the security deposit and the maintenance
reserve to limit the downside for the leasing firms in case of
bankruptcies. Leasing companies closely monitor the financial
performance of airlines.
"The lease rentals and the market value of the aircraft have
dropped from the levels attained in 2008," says Madusudanan. "The
drop has been disproportionate across various aircraft types."
Aircraft types that had overcapacity witnessed the maximum
decline. Aircraft rentals would pick up steam only by the fourth
quarter of 2010 or the first quarter of 2011, and the rentals for
new-generation aircraft are expected to increase at a faster rate
than that of older aircraft due to higher demand for the former.
Better fleet utilization and stronger deals with good underlying
credit will ensure profitability for the long haul.